The Sensex touched a historic high in 2005. The economy grew at 8% and almost every sector of business and industry exuded enormous confidence. The commodity market took off like a rocket and a newbie five-year old exchange surpassed trading volumes in the 100-year old BSE. We also saw the disgusting television spectacle of politicians taking money to raise questions in Parliament or demanding a kickback for distributing their ballooning MPLADS kitty. Let’s look into 2006 and spot the trends, issues and fights that will probably occupy the capital market and test the Securities and Exchange Board of India (Sebi) in the coming year.
For starters, the geyser of foreign funds pouring into the Indian stock market shows no signs of stopping. Foreigners invested over $10 billion in 2005 and barring unforeseen circumstances or stupid policy decisions by the government, a similar amount could come in next year. Internationally, the entry of Japanese investors is supposed to herald the end of a bull phase. But countries such as the Gulf (not NRI money) and Korea, which have never looked at India as a serious investment destination, are likely to enter the market in the coming year. At the same time, Indian mutual funds are also busy increasing their pool of assets-under-management through an array of new schemes. Get set for an overheated market, as big money looks for scarce investment opportunities.
By the end of January, or if you want to be more vague, in the first quarter of 2006, four companies of the Anil Dhirubhai Ambani Group (its latest media release suggests a subtle name change from the earlier Anil Dhirubhai Ambani Enterprises) will be listed. The listing process is already underway in accordance with the terms of the court-cleared de-merger; and it is older brother Mukesh Ambani who is listing the companies on bourses before handing them over to his younger sibling. Until then, the brothers will live with a brittle truce—with little communication and information sharing. For invest-ors, the demerger of Reliance Industries spawning five separate companies can only be good news. So long as the market remains bullish, the sum of the parts (post listing) promises to be far greater than the pre-merger entities.
The Ambani companies will not be the only ones to add much needed liquidity to the market. Initial Public Offerings (IPOs) and follow-on issues are headed into dangerous territory. Although stricter entry norms will keep away the fly-by-night operators of the early 1990s sort, greedy industrialists are busy dreaming up grandiose expansion plans to mop up public money at hefty premia. This harks back to the GDR mania, also of the 1990s, when money was raised simply because it was easy to do so. Companies are merging, acquiring, and expanding at jet speed. Brokers are opening franchise operations by the hundreds, large companies are announcing plans to create Special Economic Zones (SEZs) as if they were putting up new factories and our retail badshahs have lined up plans to dot the country with malls, multiplexes and market-cities. All these are going to be funded by Indian equity or foreign borrowings with a lot of initial investment going into real estate. A nation-wide real estate bubble seems a distinct possibility in 2006.
• Expect overheated markets; big money seeks scarce investment opportunities
• Human ingenuity finds a way to beat the most sophisticated regulatory systems
• Sebi’s IPO rating plan is inadequate; and its funding mechanism is still unclear
In the dying days of last year, the Sebi board announced plans for the rating of IPOs. But what is cleared is a far cry from what investors have been demanding. First, it is voluntary instead of being mandatory; second, the mechanism to fund the rating process has still to be announced. Mean-while, companies with dubious antecedents continue to be cleared by the regulator for raising public money. It remains to be seen if this emerging cocktail of ambition, greed and excess in the primary capital market survives through 2006.
Human ingenuity is such that it finds ways to beat the most sophisticated regulatory systems over time. Sebi’s revelations regarding the YES Bank IPO subscriptions, as well as the National Securities Depository’s (NSDL) findings with regard to mandatory Power of Attorneys (POA) obtained by brokerage demonstrate how unscrupulous investors and traders are already beating the audit trails created by automated trading systems. The YES Bank case shows how easy it was for an individual retail investor to open thousands of demat accounts in collusion with Depository Participants (DPs) and banks (who helpfully credit thousands of refund cheques into designated accounts).
While Sebi has still to unravel the scope and extent of this fraud, it has acted quickly to plug gaping loopholes. As a first step, IPO refunds will be done through the electronic clearing system; Sebi has also revived Unique Identi-fication Numbers (UINs) complete with biometric fingerprinting. Although Sebi says this will only apply to investments above Rs 5 lakh, it will be extremely difficult to monitor this. If DPs and depositories have failed to spot thousands of identical addresses in detailed demat opening procedures, it is difficult to imagine they can spot multiple identities created to beat the five-lakh limit for UINs. Either Sebi must mandate finger-printing of all investors or forget about such a move. It must also ensure that it restricts the identification to investors and does not needlessly attract public ire by encroaching on the privacy of non-investor spouses and other relatives. With so many issues on the boil, 2006 promises to be another roller-coaster ride.